Islamic finance to grow, needs to work on basics

Islamic finance consistent with Sharia law is poised to grow and take advantage of the conventional banks’ lost reputation after the global financial crisis, banking experts said Monday, but the sector still needs to work on its basics to succeed.

Although Islamic banks were the least affected by the worldwide crisis and posted strong growth, “there is no room for complacency,” the Governor of Bahrain’s Central Bank, Rasheed al-Maraj, said in Singapore.

“If we can ensure that the foundations are sufficiently robust, the Islamic financial industry has a great and profitable future ahead,” he told a conference on Islamic banking. “There is a great deal of work to be done.”

Assets of the top 500 Islamic banks jumped 28.6 per cent year-on-year to 822 billion dollars in 2009, according to the Singapore-based Islamic Bank of Asia.

Industry experts predict assets of Islamic banks to top 1 trillion dollars this year, representing about 1 per cent of all global bank assets.

“The figures of Islamic banks are impressive, but there are some challenges,” said Sultan bin Nasser al-Suwaidi, governor of the Central Bank of the United Arab Emirates.

One challenge is to set standards in accordance with Sharia law, he said, urging more coordination in rulings by Sharia boards.

Because there is no single version of Sharia, which for example prohibits the payment or acceptance of interest fees for lending, a contract regarded as Sharia-compliant by some scholars might be rejected by others, said Bahrain’s al-Maraj.

“There exists a lack of legal certainty,” he said.

For Ibrahim Hassan, chief executive officer of Malaysia’s Maybank Islamic, the issue of standards should be addressed “from a global perspective” to attract worldwide investors.

One other key driver for the sector’s growth is innovation, “to offer more products to a wider range of customers,” he said.

So far Islamic banks have a relatively high concentration of risk on real estate, al-Maraj warned, noting that it was critical for Islamic finance to “find ways of diversifying its risks.”

Islamic banks should not just aim to make profit, but “also go back to the essence of Islam,” offering micro finance for low-income clients, he said.

Innovation and research are one of Islamic finance’s weaknesses, Tripon said. Others are “very scarce” human resources and expertise.

For Tan Jeh Wuan, managing director corporate banking and capital markets at the Islamic Bank of Asia, there “is little doubt that the Islamic finance and Islamic banking institutions are in an enviable position.”

During the global crisis investors saw the risks of complicated financial products, he said.

Now there is a trend to basic products, Tan said, calling Islamic finance “an example of such no-frills financial solutions.”

“The financial turmoil has … presented windows of opportunity for promoting Islamic finance,” he said, noting that besides the Middle East, Islamic finance is becoming more widespread in Asia.

The growing economies of Indonesia, China and India – as well as Europe – are potential markets, Maybank’s Hassan said.

Looking ahead, Islamic finance would see some consolidation, BNP Pariba’s Tripon said, because “we have too many banks.”

Contrary to other analysts who painted a rosy picture of the sector’s future, Tripon gave a more moderate outlook.

“The challenges ahead of us are huge,” he said, warning that “we have to be very, very careful to stick to our principles.”

“We are progressing maybe at a slower peace, but still much faster than the conventional market.”